PERC Findings from Hurricane Katrina Disaster Research Applicable to Economic Fallout from COVID-19 Pandemic

A new report released yesterday by the Policy and Economic Research Council (PERC) offers guidance to policymakers seeking solutions to economic challenges resulting from the COVID-19 pandemic. PERC has undertaken field research in communities and regions devastated by natural and manmade disasters—including a 5-year longitudinal study on small business impacts from the 2005 hurricanes in the U.S. Gulf Coast—and sees more parallels with natural disasters than with previous financial and economic crisis.


“Past economic and financial crises involved a shock and then some lag employment consequences. The pandemic is having immediate supply and demand-side impacts that combine to surge unemployment. This is unprecedented in a modern service economy and is most similar to what we’ve seen in geographies that have been hit hard by massive hurricanes and floods,” said PERC President Dr. Michael Turner.


PERC offers the following as valuable lessons learned from natural and man-made disasters as possibly relevant for crafting policy to mitigate the likely economic consequences of the pandemic:


Speed matters. When trying to keep a small business afloat, including maintaining payrolls, speed matters in receiving aid if it is needed to make up for lost revenue. Given the suddenness and scale of the COVID-19 economic shock, this is likely to be especially true. To the extent businesses fail and time passes, the recovery may be long lasting, requiring more organic business recovery. Both initial federal and state stop-gap small business aid and longer-term, more sustainable aid is reasonable.


CDOs, Nonprofits, Local Governments Can Aid State and Federal Efforts. Nonprofits, Community Development Organizations (CDOs), Community Development Financial Institutions (CDFIs), and local governments and organizations are closer to small businesses and may be able to act more quickly than large centralized governments when it comes to disbursing aid. In fact, CDFIs are already receiving funds from larger financial intuitions for COVID-19 programs. In the Gulf Coast, crucially, these smaller institutions often provided faster ‘bridge’ aid to small businesses until larger federal and state aid was accessed. Also, the SBA could be overwhelmed, but luckily the US has an army of nonprofits across the country that can help.


Second, these smaller institutions provide counseling to small business owners on what federal and state aid is available to particular small businesses, how to apply for it, and assistance with the application process. This is crucial as small business owners may be experts in their own industry but are typically not in navigating government aid programs. This ‘last mile’ of aid should not be overlooked. While federal and state aid should be made as simple as possible, there are limits to this, and so federal and state governments should partner with smaller, on-the-ground institutions.


Grants are Preferable to Loans. While credit access is important to small business owners, if the aid is not meant for productive investment but to fill a large sales disruption, debt may act to harm the longer-term viability of the small business. Loans that can be forgiven, however, can be, essentially, viewed as grants.


Long-Term Efforts May be Needed. The recovery from Hurricanes Katrina, Rita and Wilma took several years. Our report five years after the fact showed recovery was still occurring, which was then ‘interrupted’ by other major events such as the BP oil spill and the Financial Crisis. While we can hope the recovery from the current crisis will be swift, and unlike the natural disaster of Hurricane Katrina, physical infrastructure is not being damaged and people are not moving to other areas, the economic recovery from the Financial Crisis or more ordinary recessions takes years. If long-term efforts are needed, then assistance to new businesses, startups, and entrepreneurs may be appropriate.


Pre-existing Economic Health of Small Business Owners Will Matter.  Small business owners often tap their own personal assets and credit to survive disruptions. Those with low family wealth, or otherwise reduced access to credit may find it more difficult to survive more than a very short-term business disruption if government aid does not sufficiently fill the gap (which may be difficult in many cases).


Disparate Impacts are Likely. Given that minority business owners tend on average to have lower family wealth and income, they would have on average fewer available assets and less credit access that can be deployed to withstand major business disruptions. Without perfect government aid, this should lead to disparate impacts in terms of business closings. However, this will also depend on the distribution of minority businesses in terms of types and locations of businesses, which will be impacted differently by the COVID-19 crisis and economic fallout.


Impacts Will Vary by Geography. While impacts will no doubt vary by type of business, they will also vary by geography. Some locations have been much harder hit by COVID-19 and need a different degree of response. Apart from differences between cities, there may be differences between city centers, urban, suburban, and rural areas in general.


Communities are Ecosystems. If workers are let go (which is already happening), and businesses close, then the task of recovery becomes harder, as in order for small businesses to recover, the community as a whole will need to recover (their customers and suppliers).


Utilize Data and Surveys to Monitor, Provide Feedback of Impacts and Recovery Efforts. The private sector has datasets that can be utilized to monitor sales and economic impacts of COVID-19 in near real-time. Credit bureaus can monitor individual financial well being. These data should be utilized to monitor both COVID-19 economic impacts and the efficacy of recovery efforts. Government agencies should have ongoing surveys of small business owners to gauge need and identify any deficiencies of government programs and allow them to be continually improved. Real time feedback is important.


Maintaining Integrity of Credit Reporting is Key. While short-term changes to credit reporting might be needed during the COVID-19 crisis, credit reporting is simply information about true financial conditions (which should be addressed by aid efforts and programs). As such it is a very useful source of information. Credit reporting increases access to credit, and if its integrity is diminished, this will begin to harm credit availability. As PERC and other research has shown, lower-income households and those on the credit margins will be harmed disproportionately. This will similarly harm small businesses as they also utilize personal credit (particularly the smallest of businesses). Longer-term disruptions to credit reporting that reduce its integrity will begin to harm recovery efforts.


Read our Hurricane Katrina reports here: